So, when Friedman returned from his 1968 fantasy economy to the real world of lending and borrowing, and of commercial banks and a central bank (the world of his 1963 article, as well as of dozens of others), not once did he recommend the helicopter drop. Media prattle about helicopter money and the constant referencing to Friedman are just a lot of silliness. Friedman was entirely conventional, thinking in terms of purchases of securities by the central bank as the archetypical monetary policy action.
Last month the Bank of England announced a package of monetary policy measures to avert a supposed Brexit-related recession. Most observers accepted that, because the Bank’s policy rate was already down to 0.5 per cent, the further reduction to 0.25 per cent could hardly make much difference to the economy. The interesting part of the announcement was that the Bank intends to expand its “quantitative easing” programme. It plans to purchase £60 billion more gilt-edged securities and, in a new departure, £10 billion of corporate bonds. QE matters because it increases the quantity of money. What would Milton Friedman make of the Bank’s operation?
We need to check whether money growth has been too slow, too fast or about right in the recent past. The last set of money numbers showed that in the year to June the UK’s quantity of money (labelled M4x in the data) went up by 5.8 per cent, the highest figure since 2008. Further, money growth has accelerated in the last few months. On this basis, the extra £70 billion of asset purchases — which will add over 3 per cent to the quantity of money — is unnecessary. The case for such a large stimulus depends heavily on the forecasts of a Brexit recession, and the forecasts may be wrong. Friedman’s signature prescription was not helicopter money, but stable growth of the quantity of money. Money growth of 4 or 5 per cent a year is about right for the UK in the long run; an annual rate of money growth in the high single digits would be excessive and take risks with inflation.
Last month the Bank of England announced a package of monetary policy measures to avert a supposed Brexit-related recession. Most observers accepted that, because the Bank’s policy rate was already down to 0.5 per cent, the further reduction to 0.25 per cent could hardly make much difference to the economy. The interesting part of the announcement was that the Bank intends to expand its “quantitative easing” programme. It plans to purchase £60 billion more gilt-edged securities and, in a new departure, £10 billion of corporate bonds. QE matters because it increases the quantity of money. What would Milton Friedman make of the Bank’s operation?
We need to check whether money growth has been too slow, too fast or about right in the recent past. The last set of money numbers showed that in the year to June the UK’s quantity of money (labelled M4x in the data) went up by 5.8 per cent, the highest figure since 2008. Further, money growth has accelerated in the last few months. On this basis, the extra £70 billion of asset purchases — which will add over 3 per cent to the quantity of money — is unnecessary. The case for such a large stimulus depends heavily on the forecasts of a Brexit recession, and the forecasts may be wrong. Friedman’s signature prescription was not helicopter money, but stable growth of the quantity of money. Money growth of 4 or 5 per cent a year is about right for the UK in the long run; an annual rate of money growth in the high single digits would be excessive and take risks with inflation.
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